Econ 301 Bilkent University
Econometrics Department of Economics Spring 2025
Problem Set 1
1- Wooldridge 1.2
Suppose that you are asked to conduct a study to determine whether smaller class sizes
lead to improved student performance of fourth graders.
i. If you could conduct any experiment you want, what would you do? Be
specific.
ii. More realistically, suppose you can collect observational data on several
thousand fourth graders in a given state. You can obtain the size of their fourth-
grade class and a standardized test score taken at the end of fourth grade. Why
might you expect a negative correlation between class size and test score?
iii. Would a negative correlation necessarily show that smaller class sizes cause
better performance? Explain.
2- Wooldridge 2.1
Let kids denote the number of children ever born to a woman, and let educ denote years
of education for the woman. A simple model relating fertility to years of education is
𝑘𝑖𝑑𝑠 = 𝛽0 + 𝛽1 𝑒𝑑𝑢𝑐 + 𝑢 where u is the unobserved error.
i. What kinds of factors are contained in u? Are these likely to be correlated with
level of education?
ii. Will a simple regression analysis uncover the ceteris paribus effect of
education on fertility? Explain.
3- Wooldridge Appendix-A1.
The following table contains monthly housing expenditures for 10 families.
i. Find the average monthly housing expenditure.
ii. Find the median monthly housing expenditure.
iii. If monthly housing expenditures were measured in hundreds of dollars, rather
than in dollars, what would be the average and median expenditures?
iv. Suppose that family number 8 increases its monthly housing expenditure to
$900, but the expenditures of all other families remain the same. Compute the
average and median housing expenditures.
4- Wooldridge Appendix-A2.
Suppose the following equation describes the relationship between the average number of
classes missed during a semester (missed) and the distance from school (distance,
measured in miles):
𝑚𝑖𝑠𝑠𝑒𝑑 = 3 + 0.2𝑑𝑖𝑠𝑡𝑎𝑛𝑐𝑒
i. Sketch this line, being sure to label the axes. How do you interpret the intercept
in this equation?
ii. What is the average number of classes missed for someone who lives five miles
away?
iii. What is the difference in the average number of classes missed for someone
who lives 10 miles away and someone who lives 20 miles away?
5- Wooldridge Appendix-A4.
Suppose the unemployment rate in the United States goes from 6.4% in one year to 5.6%
in the next.
i. What is the percentage point decrease in the unemployment rate?
ii. By what percentage has the unemployment rate fallen?
6- Wooldridge 2.3
The following table contains the ACT scores and the GPA (grade point average) for eight
college students. Grade point average is based on a four-point scale and has been rounded
to one digit after the decimal.
i. Find the average ACT scores and the GPA (grade point average) for the
sample. What are the lowest and highest ACT scores. Does the range make
sense?
ii. Comment on the direction of the relationship between GPA and ACT scores.
Write a simple linear regression model. Since there is never exact relationship
between two variables, how do we allow other factors to affect y?
iii. How can we be sure we are capturing a ceteris paribus relationship between
GPA and ACT scores? Explain.
iv. Estimate the relationship between GPA and ACT using OLS; that is, obtain the
intercept and slope estimates in the equation. Comment on the direction of the
relationship. Does the intercept have a useful interpretation here? Explain.
How much higher is the GPA predicted to be if five points increase the ACT
score?
iv. Compute the fitted values and residuals for each observation, and verify that
the residuals (approximately) sum to zero.
v. What is the predicted value of GPA when ACT is 20?
